UK rate cut likely by the summer

THE Bank of England's Monetary Policy Committee is expected to leave UK interest rates on hold on Thursday, but more reductions are expected in early summer. The decision to cut in February to a 48-year-low of 3.75% was a pre-emptive one and since the outlook has not deteriorated, the bank will not see a need for rates to move lower still. The recent fall in sterling will also ensure that the brake stays on for now.

Accountancy firm BDO Stoy Hayward said today that last month's 0.25% cut is unlikely to stimulate flagging consumer confidence and weak business investment. It predicts further rate reductions in May or June, but added that prospects for the UK economy are worsening as tensions mount in the Middle East.

Its monthly business trends report says the risk of new tax hikes and the cooling housing market is knocking business confidence. Consumer demand is slowing and businesses are delaying major investment decisions while tensions in Iraq increase.

Many leading banks are now forecasting further rate cuts. Christel Rendu De Lint, economist at Morgan Stanley, said: 'A rate cut would be timed with the war in Iraq and probably would be 50 basis points in one go.' Peter Dixon, at Commerzbank, said: 'The MPC may stand pat this week, but could come down again in the second half of the year.'

The flagging UK economy should get a boost on Thursday when the European Central Bank cuts its interest rate, by a possible 50 basis points from 2.75%.

Economists believe that ECB president Wim Duisenberg and his colleagues have at last realised that the very uncertain geopolitical environment is weighing on business confidence and, unless rates are cut, there is a real risk that even an end to the Iraq crisis will not lead the economy out of the downturn.